What Clients Need to Know About ETFs

With over $500 billion in net inflows in the first half of 2025, exchange-traded funds are scorching. 

The persistent growth is reshaping both client portfolios and financial advisor conversations. As the industry looks ahead to the potential approval of share classes, a game-changing structural development, it’s more important than ever for advisors to understand the evolving ETF landscape to help their clients navigate a growing list of investment choices.

Advantage, ETFs

Investors’ growing preference for ETFs is largely driven by the structural advantages. Unlike mutual funds, ETFs typically transact in-kind on the primary market, making them more tax-efficient. They also offer intraday liquidity by trading on exchanges in the same way stocks do, enabling investors to respond to market fluctuations in real time. ETFs generally feature lower expense ratios than mutual funds, too, making them a more cost-effective option for many investors. 

Since the SEC’s adoption of the ETF rule in 2019, launching them has become faster and more streamlined. More than 2,500 such funds have come to market over the last six years, with actively managed ETFs accounting for the majority. In addition, more than 140 mutual funds have converted into ETFs, giving investors new access points to long-established strategies in a tax-advantaged structure. 

Now, advisors have over 4,000 ETFs to navigate in the US marketplace alone. While this abundance offers flexibility, it also introduces complexity. Advisors looking to guide their clients through the noise, should keep the following in mind:

• Educate on the ETF structure. The lower cost profile, tax-efficiency and liquidity are all compelling benefits to ETFs. The ETF vehicle offers investors access to more strategies than ever, and advisors must be able to articulate this expanded access to investors clearly.
• Address common misconceptions. Many still associate ETFs with passive investing. While that was once the norm, today’s market includes a wide range of actively managed ETFs that provide access to various asset classes and investment strategies.

• Check manager track records, even outside the ETF vehicle. The performance of the ETF vehicle is not limited to its structure; it rests heavily on the manager’s broader experience. Advisors should ensure managers have a strong track record across mutual funds and other vehicles, offering their clients insight into consistency, strategy and long-term performance.
• Align with client risk profiles and objectives. ETF selection goes beyond general exposure. Advisors must evaluate how well the fund’s strategy and exposure aligns with their client’s tolerance for risk, as well as their short- and long-term goals.
• Don’t forget about liquidity. Many investors fall into the trap of focusing only on bid-ask spreads or daily volume, but underlying asset liquidity is just as crucial for execution and flexibility. Advisors can ensure their clients are not overlooking compelling opportunities by focusing solely on superficial metrics.

Sharing Is Caring

One of the most anticipated changes in the ETF world is the possible approval of ETF share classes for mutual funds. Vanguard’s long-held patent on this structure expired in 2023, and since then, over 60 asset managers have applied for SEC exemptive relief to launch similar offerings. If approved, this structure would allow asset managers to offer ETFs as a share class of existing mutual funds rather than as a separate fund. 

It would also open up new access to familiar strategies with long track records along with the tax-efficiency, lower cost profile and liquidity the ETF vehicle offers. There would potentially be no taxable events for mutual fund holders switching to the ETF share class within the fund, and the fund’s history and performance could be preserved.

Though the industry is working through potential operational hurdles that may take some time, the potential to bring trillions of dollars in mutual fund assets into the ETF format could mark one of the most profound shifts in the investment landscape in recent history.

What’s the Takeaway? For advisors, staying up-to-date on ETFs is essential for ensuring clients make informed investment decisions. Advisors can help their clients by educating them on the benefits of the ETF vehicle, clarifying frequent misconceptions and helping guide them on selection and trading. With exemptive relief for ETF share class on the horizon, monitoring ongoing developments is more important than ever. As ETFs continue to grow in scope and sophistication, they will play an increasingly central role in how advisors design and deliver value to their clients.

– Matt Barry is Head of ETFs at Touchstone Investments.